Why Compliance is Critical for Cannabis Businesses in 2024
Compliance in the cannabis industry is more complex and essential than ever. With evolving regulations, increased oversight, and the potential for severe financial and legal penalties, cannabis companies must stay on top of compliance requirements to succeed. This guide offers cannabis business leaders a comprehensive look at how to navigate compliance challenges in 2024, from understanding new laws to implementing best practices for risk management.
The Current Landscape of Cannabis Compliance
1. Overview of Key Regulatory Agencies
Cannabis businesses face a unique web of regulations spanning federal, state, and local levels. Key regulatory agencies include:
- The Drug Enforcement Administration (DEA) – Although cannabis remains illegal federally, DEA policies and enforcement priorities can impact cannabis businesses, especially in cases involving cross-state operations.
- The Food and Drug Administration (FDA) – For companies producing CBD or cannabis-infused products, the FDA has strict regulations regarding marketing claims and product standards.
- State Cannabis Regulatory Bodies – Each state has its regulatory framework, often with specialized agencies, like California’s Department of Cannabis Control (DCC), overseeing licensing, compliance inspections, and penalties.
Keeping up-to-date with each agency’s policies and understanding their areas of influence is foundational to maintaining compliance.
2. Changes in Federal and State Cannabis Laws for 2024
Federal legislation around cannabis has been in flux, with multiple bills in Congress seeking to either reschedule or fully legalize cannabis. Additionally, state laws continue to evolve with changes to licensing requirements, testing standards, and tax policies. As of 2024, several key developments include:
- Rescheduling Proposals: Several bills have been introduced to reclassify cannabis from Schedule I to a lower classification, potentially easing federal restrictions.
- New State Markets: States like Minnesota, Missouri, and others have opened new legal cannabis markets or expanded their programs. Each new market brings unique regulations cannabis businesses must understand.
- Interstate Commerce Rules: States such as Oregon have started exploring frameworks for cannabis products to move across state lines, which could become a significant regulatory shift affecting supply chain compliance.
Core Compliance Requirements for Cannabis Businesses in 2024
1. Licensing and Permitting
Obtaining the right licenses and permits is the cornerstone of any compliant cannabis business. For 2024, licensing requirements have tightened, and annual renewals often require extensive documentation and transparency about operations. Compliance with licensing includes:
- Application Documentation: Ensuring all ownership, financial, and operational information is current and accurate.
- Zoning Compliance: Confirming that facility locations meet state and local zoning laws for cannabis businesses.
- Continuous Monitoring: Many states now require businesses to regularly update licensing agencies on any changes in business operations, such as ownership, financial structure, or product offerings.
2. Track-and-Trace Systems
Seed-to-sale tracking remains a fundamental requirement for cannabis compliance. These systems are designed to prevent diversion and ensure product quality by monitoring cannabis from cultivation to final sale. Compliance essentials for track-and-trace systems include:
- Real-Time Data Logging: Accurate, timely data entry into state-mandated systems like METRC or BioTrack.
- Auditing and Reporting: Regularly auditing track-and-trace data to catch discrepancies early and report as required.
- Inventory Management: Ensuring inventory counts match reported data in the track-and-trace system, particularly during inspections or audits.
3. Product Testing and Quality Control
Product testing protocols have become increasingly stringent to ensure consumer safety. Cannabis products must be tested for potency, pesticides, heavy metals, mold, and other contaminants. Compliance requirements include:
- Third-Party Testing: Working with state-approved labs to meet testing standards and provide reliable results.
- Documenting Results: Keeping comprehensive records of testing results, often mandated for submission to regulatory agencies.
- Recalls and Reporting: In the event of a product recall, businesses must follow specific protocols to remove products from shelves and notify consumers and regulators.
Navigating Financial Compliance: Taxes and Cash Management
1. Cannabis-Specific Tax Requirements
Tax compliance is one of the most complex areas for cannabis businesses. With cannabis still illegal at the federal level, Section 280E of the Internal Revenue Code disallows standard business deductions, significantly increasing the tax burden. Key tax compliance strategies include:
- Accurate Recordkeeping: Keeping detailed financial records to substantiate deductions and prevent issues in audits.
- Cost Segregation for 280E: Developing strategies to allocate indirect costs to cost of goods sold (COGS) to legally reduce taxable income.
- State Cannabis Taxes: Staying up-to-date on changing excise and sales tax rates for cannabis products, which vary by state and even municipality.
2. Banking and Cash Management
Banking remains a compliance challenge due to federal restrictions. While some cannabis businesses have access to banks, many operate on a cash-only basis, creating risks around money laundering and cash handling. Compliance measures include:
- Suspicious Activity Reporting (SARs): Banks that serve cannabis businesses file SARs with federal regulators. Cannabis businesses need policies for transparent, documented transactions to facilitate this process.
- Cash Management Protocols: Secure cash handling procedures, like armored transport services and regular reconciliation of cash transactions, reduce compliance risk.
- Alternative Financial Solutions: Some cannabis companies use credit unions or fintech services that cater to the industry to reduce reliance on cash.
Implementing Effective Compliance Strategies
1. Building a Compliance Team
An effective compliance team is integral to navigating the diverse compliance landscape. For many cannabis companies, this includes:
- Hiring a Compliance Officer: An in-house compliance officer or team can coordinate all compliance efforts across licensing, taxes, and operations.
- Consulting with Legal Experts: Cannabis-specific legal advisors help navigate complex regulations and provide guidance during audits or inspections.
- Continuous Training: Compliance policies evolve quickly, making regular staff training essential to prevent lapses.
2. Conducting Regular Compliance Audits
Routine audits allow cannabis companies to proactively identify and correct compliance issues. Key areas to audit include:
- Inventory Audits: Ensuring inventory matches track-and-trace records to avoid discrepancies.
- Financial Audits: Reviewing financial transactions, particularly those involving cash, to ensure compliance with financial reporting standards.
- Documentation Reviews: Ensuring all required documents, such as licenses, test results, and training certifications, are up-to-date and accessible.
3. Technology Solutions for Compliance
Automated compliance solutions help cannabis companies stay current with regulations. Options include:
- Regulatory Software: Specialized compliance software like Simplifya or Green Bits can track regulatory changes and help automate compliance reporting.
- Data Analytics: Data analytics can provide insights into compliance risk areas, such as inventory discrepancies or customer purchasing patterns.
- Document Management Systems: Keeping digital records of compliance documentation allows for easy access during audits and inspections.
Compliance Challenges for Multi-State Operators (MSOs)
Operating across multiple states adds an extra layer of complexity due to differing regulations. Compliance strategies for MSOs include:
- State-Specific Compliance Teams: Assigning compliance officers to each state ensures local compliance expertise.
- Unified Track-and-Trace: Implementing a standardized track-and-trace system across locations helps simplify compliance.
- Interstate Compliance Audits: Regular audits across locations help MSOs identify compliance inconsistencies and prevent penalties.
Expert Tips for Staying Ahead in Cannabis Compliance in 2024
- Stay Updated on Regulatory Changes: Attend industry events and follow regulatory announcements to remain aware of new compliance requirements.
- Network with Industry Peers: Other cannabis businesses can provide insights into best practices and alert you to potential compliance issues.
- Engage with Regulatory Bodies: Establish open communication with regulatory agencies to stay informed about inspections and potential changes.
Make Compliance a Core Business Priority in 2024
Compliance in the cannabis industry is non-negotiable and should be treated as a foundational element of business strategy. By building strong compliance frameworks, investing in technology, and staying informed on regulatory changes, cannabis businesses can not only avoid fines and operational disruptions but also foster trust and credibility with consumers. For cannabis businesses looking to thrive, proactive compliance is a direct path to resilience and growth in 2024.